In quiet FX markets, two stories are dominating. The first is a more dovish than expected Reserve Bank of New Zealand meeting; the second is the start of Japanese investment into the US as part of the trade deal. Both are mildly positive, and the data calendar today looks a little dollar positive too
USD: Data Should Be Mildly Dollar Positive
The dollar has been edging a little higher this week and, in effect, reconnecting with the more upbeat US activity data. That trend is expected to continue today on the back of some constructive and data. After the European close, we will also see the release of the minutes of the January , where a firm consensus around a pause should be evident. That could rein in current expectations of around 59bp of easing this year, with ING’s house call at -50bp. The uncertainty here stems from the likely arrival of Kevin Warsh as Fed Chair in May and how he will steer the central bank. Here, the market is on the lookout for any dates of confirmation hearings, which will be seen as a dollar negative event risk.
Away from the US, two events overnight can be seen as mildly dollar positive. The first is the more dovish than expected Reserve Bank of New Zealand meeting, where the new governor, Anna Breman, has sounded in no rush to hike rates later in the year. The market had been erring towards a Reserve Bank of Australia-like hawkish turn. The drop in has dented the view that optimism on the global economy could prompt a hawkish re-pricing across the board for the procyclical currency segment. Markets will now increasingly follow the New Zealand housing market and consumer sector – seen as the weak links in the recovery story.
The other hot story is the US and Japan announcing the first details of Japan’s $550bn commitment to invest in the US. The first of these is a $33bn investment in a natural gas production facility in Ohio to be managed by a subsidiary of Softbank. Direct Japanese investment into the US will be a key watch factor this year, and one which adds to the very mixed picture on . Japanese Ministry of Finance data shows that new Japanese direct investment overseas last year rose back to the pre-pandemic peak of around JPY20tr annually. The question for FX markets this year is whether this investment proves a supportive dollar flow or something like Japan’s FX reserves are used to guarantee new USD loans and avoid pressure on the yen. The latter seems to be the preferred outcome for Tokyo.
We do not see anything too negative out there at the moment for the dollar, and ahead of what should be a strong 4Q25 US release this Friday, we think can stay supported in a 97.50-98.00 range.
EUR: Lagarde Speculation
Early Europe has seen the Financial Times report that Christine Lagarde could exit her position as President of the European Central Bank ahead of its natural expiry in October 2027. The reasons cited point to a preference for the next ECB president to be confirmed before the French presidential elections next April, so that Emmanuel Macron can still have a say. Expect focus to shift to two of the leading candidates to replace Lagarde: Spain’s Pablo Hernandez de Cos and Germany’s Joachim Nagel, who has even recently welcomed additional common borrowing in the EU. It looks too early for this story to impact the euro yet.
With Asia on holiday for the rest of the week and the data calendar relatively light today, expect to trace out a modest 1.1800-1.1850 range. We will also be interested to hear which foreign central banks are signing up to the ECB’s expanded EUREP facility – something which, in theory, should be happening over the next three to four months.
GBP: CPI Data Proves a Reprieve
After being hit with soft labour market data yesterday, today’s UK January data has given sterling something of a reprieve. Here’s what ING’s UK economist, James Smith, has to say about today’s data:
’It’s a bit of a mixed bag on UK inflation this morning. Food inflation is down sharply (albeit more or less in line with Bank of England forecasts). That should be good news for the hawks, who worried that elevated food inflation would spark a more persistent, wider bout of inflation. But services inflation is stickier – and importantly, the BoE’s core services metric (which we calculate) is up slightly. Not a game-changer here for the near-term BoE outlook, but at the margin moves the dial slightly closer to the hawks. The real action will come in April, though; if headline/services inflation comes down as far as expected, then that should go some way to making the Bank more comfortable with the inflation outlook.’
is off modestly on the news, but should find support in the 0.8710/20 area. Later this week, we could get some flash eurozone February PMIs, which will be supportive for the euro. And next week’s by-election in the UK could throw more political pressure on Prime Minister Keir Starmer’s leadership team. Our EUR/GBP bias is towards 0.88 by the end of March.
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